DBA Business Structures Vs Sole Proprietorships: What Is Better In 2021?
- Small businesses are among the most common and most important actors in the US economy, with many of these being sole proprietorships.
- Sole proprietorships are the simplest, quickest and easiest business structures for single-owner small businesses in their early phase of development.
- DBAs (Doing Business As) are trade names that business owners use to conduct commercial activities without having to create a new legal business entity.
Choosing a legal structure for a small business is a crucial decision that can have fundamental implications for the business’ commercial success, particularly in today’s challenging and tumultuous business environment.
The type of business structure determines critical aspects from management and operations, to financial liability and taxation.
Sole proprietorships are by far the most common type of small business structure, comprising 86% of non-employer small businesses in the US. Other common forms include partnerships, and limited liability corporations (LLCs).
Understanding the features, advantages and disadvantages of different business structures is vital for selecting the structure best suited for one’s business.
This article will focus on sole proprietorships, DBAs, and how these relate to each other. Ultimately however, determining the best type of business structure depends on the specific nature and needs of the business in question.
As the name suggests, sole proprietorships are small businesses with a single owner. This is the simplest type of legal business entity, and is the default business structure for most small enterprises. The defining features of sole proprietorships are as follows:
- One owner,
- Organisational and administrative simplicity,
- Integration of business and personal incomes and costs.
Sole proprietorships therefore offer small business owners the advantage of organisational autonomy, simplicity, and flexibility. As such, sole proprietorships can be registered, operational and successful in a short time period.These are some of the principal reasons why sole proprietorship is such a common business structure in the contemporary US economy.
Nevertheless, it should be emphasized that sole proprietorships imply sole financial liability. Unlike LLCs and partnerships – the owner of a sole proprietorship is personally liable for all financial debts and unforeseen costs incurred by the business. This is certainly the main disadvantage of the sole proprietorship structure.
DBA stands for ‘doing business as’, and refers to a ‘fictitious’ or ‘assumed’ trade name that businesses use to conduct commercial activities. A DBA is not, therefore, a type of legal business entity or structure like sole proprietorships, partnerships, and LLCs.
In the case of sole proprietorships, business owners need to use DBAs if their business name is different from their personal name. For example:
- A business owner called Craig Smith would need a DBA if his business was called ‘Craig’s Craft Cornucopia’,
- In contrast, if Craig’s business was called Craig Smith’s Craft Cornucopia’, this would negate the need for a DBA.
Some states, like Florida, business owners are legally required to register and make public notification of their DBA (this website provides further information). Regardless of whether a DBA is a state legal requirement or not, there are several reasons why small businesses like sole proprietorships might benefit from registering a DBA:
- It is a cheap a easy way to create a business name and identity, and doesn’t require the formal creation of a legal business entity,
- It allows a single legal business entity to own and operate multiple businesses to be operated (under multiple DBAs),
- DBAs allow business owners to tailor their business name to suit their industry, and to also to stand out from competition,
- Crucially, banks generally require that business owners register a DBA name in order to be eligible to open a business bank account.
DBAs And Sole Proprietorships In 2021 And Beyond
The contemporary business environment is becoming more challenging and competitive each year, and in the transition to a Post-COVID economy, small businesses in particular need to use whatever strategic means available to secure and advance their interests. As The Really Useful Information Company (TRUiC) emphasizes, DBAs are tool that, even if not required by state law, should be seriously considered by small business owners.
DBAs offer a low cost way of creating a unique and distinguishable brand identity, which is fundamental for business success in the ever more saturated and competitive economy.
The organisational flexibility of DBAs, which allow business owners to conduct multiple business activities without needing to create multiple legal entities, is another fundamental advantage under increasingly dynamic and differentiated market conditions.